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The cashless society myth: PayPal, Square, and bitcoin have not stopped cash from being a growth business

Key Points
  • US. cash in circulation has grown at a 5 percent-plus rate for the past two decades, with the number of notes in circulation doubling to 40 billion between 1996 and 2016.
  • Cash remains the most frequent method of payment in the U.S., representing roughly 31 percent of consumer transactions, more than electronic, credit, debit or checks.
  • Even with internet sales led by Amazon growing quickly, e-commerce represents less than 10 percent of all retail transactions.
  • Use of cash by U.S. households is consistent across most income levels, around 25 percent, and goes way up at the lowest incomes.

If you listen to the way mobile payments executives talk about cash, the only thing as certain as its death is their reluctance to be the ones accountable for putting that event on any kind of timetable.

A printing supervisor inspects newly printed sheets of $1 bills at the Bureau of Engraving and Printing in Washington, D.C. 
Mark Wilson | Getty Images News | Getty Images

"I would never predict the death of cash over the next decade or two. I think cash is going to be with us for a long time to come," PayPal CEO Dan Schulman recently told the New York Times.

"It's still decades and decades and decades. It's going to take our lifetime and our kids' lifetime before you start to see this work itself out," said Michael Vaughan, chief operating officer at millennial-friendly Venmo — which is owned by PayPal — when he spoke at a Wharton conference earlier this year.

Danny Meyer is standing behind his belief in cashless restaurants, even though one of the most prominent restaurant chains he founded, Shake Shack, stumbled out of the starting gate when it tried to put that theory into practice as an experiment in a few of its burger joints.

With the rapid disruptions caused by successful Silicon Valley-based mobile payment companies like PayPal and Square, and technology giants Google and Apple making greater efforts to handle purchase transactions through smartphones, it is easy to expect the dollar's obit to appear any day now. But even Amazon, with an increasing hold over consumer spending in an e-commerce environment, and internet transactions growing at an annual rate above 15 percent, it represents a sector with less than 10 percent of all retail transactions. And data from the Federal Reserve Bank of St. Louis shows that U.S. currency in circulation, over $1.6 trillion currently, continues to go in only one direction: up. 

Cash in circulation has growth at a 5 percent rate for the past 20-plus years, with the number of notes in circulation doubling to 40 billion between 1996 and 2016. That annual growth rate has ticked up a little higher recently and matches the growth of euro notes in circulation — roughly 6 percent growth, according to the European Central Bank. Cash remains the most frequent method of payment in the United States, representing roughly 31 percent of consumer transactions, more than electronic, credit, debit or checks.

Cash usage is consistent across most U.S. household income levels and increases significant at lower incomes — 30 percent of U.S. households are unbanked or underbanked. In international markets, demand for dollars — specifically $50 and $100 denominations — remains high, according to the Fed.

Percentage of cash usage by US household income

Income level Percentage using cash Percentage of US households in income level
$125,000 and greater24%19%
$100,000 to $124,99925%9%
$75,000 to $99,99926%12%
$50,000 to $74,99927%17%
$25,000 to $49,99935%22%
Less than $25,00043%21%

Source: Federal Reserve Bank, US Census

For all the experimenting with cashless kiosks, some institutional investors have put an alternate theory to work: There is still a lot of money to be made in cash.

Closely watched activist hedge fund Starboard Value took a big stake in cash management company Brink's a few years ago, seeing lots of money being left on the table by a bloated company unmotivated to make the most of its opportunity. Starboard has trimmed back on its position since a new management team was put in place under turnaround executive Doug Pertz, and growth metrics — and stock performance — improved. Brink's stock is now the third-smallest holding among publicly traded stocks reported in Starboard's portfolio, at roughly $47 million, according to an SEC filing from May and based on the current share price.

SouthernSun Asset Management, an affiliate of asset management conglomerate Affiliated Managers Group, remains a big investor in Brink's. One factor that sparked its portfolio management team's interest in cash as a stock story: all of the headlines about its impending death.

"The world has seemed locked into always discounting these businesses as if there is no way for them to adapt," said Michael Cook, SouthernSun CEO and chief investment officer. And that led him to a related question: Were businesses like Brink's potentially undervalued? Its closest competitors include overseas company Loomis and Prosegur.

"For them it is not where retail is going to be 20 years from now, but retail is not dead and the retail market is under-penetrated from a cash management standpoint," the fund manager said. "Amazon is an increasing part of my life, but money disappears at Walgreens each day."

The fastest-growing cash markets are overseas

Cash still accounts for the overwhelming number of consumer transactions globally.

The percentage of households using cash is much higher in the developing world than it is in the United States or Europe, and that is where Brink's growth is strongest, with South America representing 29 percent of total revenue but 49 percent of operating profit. North America is 39 percent of revenue but only 20 percent of operating profit.

"The key markets don't have headwinds the average American who follows the stock market would think," Cook said. "In literally every other market than in America, people are pretty conscious about making sure they have money in euros or rupees," he said. "That's the anecdotal piece of it, but the large-scale numbers there still back it up."

World's largest cash management companies

Company Annual revenue Countries serviced
Brink's$3.2 billion117
Prosegur$2.1 billion15
Loomis$2 billion20
G4S$1.6 billion44
Garda$0.8 billion2

Source: Brink's, June 2018

South America, it is a highly cash-driven society, and whether it is Brazil or other country, a higher proportion of the population is unbanked or underbanked. Brink's estimates that roughly 85 percent of the Brazilian market uses cash — Mexico is even higher, at 90 percent — and roughly 50 percent of Brazilian households are unbanked, according to World Bank data.

There are many projections about developing markets leapfrogging from no banking straight to mobile payments — and some high-profile success stories, such as M-Pesa in Kenya — but cash is still a heavy driver of business among the underbanked and underbanked. The 90 percent cash usage rate in Mexico is a direct result of the underbanked segment of society.

The next big cash market may involve moving weed

This October, Canada is expected to legalize cannabis at the federal level, though there have been prior delays in Canadian politics related to cannabis legislation. Brink's management is eyeing the Canadian marijuana market, an opportunity it cannot capitalize on in U.S. states where marijuana sales have been legalizes, given federal prohibition.

"We are probably well positioned to help handle the cash in the marijuana market," Pertz said, alluding to the company's historic footprint in the North American market. He said Brink's also may find opportunity in managing the product. The company, probably best known for its iconic armored trucks, thinks that in addition to handling the retail marijuana market cash, the agricultural growing operations will require transport of finished and raw products. Brink's already handles other "high-value" products, such as jewelry and precious metals, in addition to bulk cash.

"As the government legalizes, it opens up a whole new world of conversations in Canada," Pertz said.

"Banks want to help their clients succeed, including those in the cannabis sector," said a spokesman for the Canadian Bankers Association. "Banks in Canada have been working diligently to understand, prepare and assess the new opportunities and areas for consideration for the introduction of the recreational use of cannabis," which he said involves the production, storage and distribution of recreational cannabis.

Investor Cook said it is an interesting market, but predictions that cannabis can be a cash flow needle mover are premature. "No one really understands how big the cannabis market can be. It's a total wildcard, so any current projects on growth rates are irresponsible," he said.

Federal regulation requires that all banks have a certain amount of cash available same day. They don't do that with cryptocurrency or Venmo cards.
Doug Pertz
Brink's CEO

Whether Brink's or any of its competitors remain a good stock market investment will certainly not rest on the marijuana market alone, and may relate to factors other than global cash usage trends. Even though paper currency is resilient, it is not as if cash use can be described as exploding all over the world. Foreign currency swings and global acquisition hiccups weighed on Brink's in the most recent quarter. Its shares have made major gains in the past five-year period, but the company and its competitors, Loomis and Prosegur, have hit a wall with stock prices in the past year.

"BCO is now at the midpoint of its three-year strategic plan and remains on track to continue generating organic growth and complete accretive acquisitions," SunTrust Robinson Humphrey analyst Tobey Sommer wrote in a post-earnings recap.

Brink's struggled because of pricing pressure after the financial crash — banks would no longer pay the premiums that the company had been accustomed to demanding, according to investor SouthernSun Asset Management. The company and its competitors had to figure out a better cost structure, and Brink's competitors figured it out first, which led to the Starboard investment and turnaround plan.

"They hung their hat on being the premium player and thinking 'people need to pay us. Our trucks are bigger and better than anyone and our security people can shoot straighter,'" said SouthernSun senior analyst and principal Phillip Cook. "When Doug came in as a turnaround guy ... We knew there was lots of low-hanging fruit. They are by no means finished with that, but they are on it. The opportunity for cash flow improvement is significantly higher than from organic growth alone. "They don't need it growing double digits. We are OK with low- to mid-single digits because of the margin opportunity."

There is no doubt big tech is coming for cash, and gaining on it

"People talk about the cashless society for real reasons. There is real new technology that is coming into the market," Phillip Cook said. "But there is an interesting, false correlation where people say, 'Look, Brink's is not able to grow like they used to because people are not using cash anymore," Cook said.

Conversion to mobile payments "won't just happen overnight," Brink's CEO Pertz said.

Alphabet CEO Sundar Pichai remarked on the tech giant's recent earnings call that a big growth opportunity is payments in emerging markets. "We do see unique opportunities in these markets ... payments as a good example. And you've seen us address that exclusively with Google Tez in India. And so we will look to do more like that. ... There is a lot of innovation, which is going to happen from these countries, both for their own markets and for the world beyond. And we want to be in a position to do that well."

Apple Pay has been dogged by criticism about a much slower-than-expected adoption rate — "a hell of a lot slower" than anticipated, Pertz said — but its use tripled in Apple's most recent reported quarter from a year ago. Apple CEO Tim Cook called out Apple Pay's growth in the recent earnings: 24 global markets, 4,900 banking partners and "well over 1 billion transactions last quarter, triple the amount from just a year ago." Cook said it was more "mobile" transactions than "great companies" like PayPal are doing, but overall PayPal conducted 2.3 billion transactions in the quarter ended June 30. Gross payment volume at Square was over $21 billion in the second quarter.

PayPal's Schulman told the Times that "people are slowly but surely moving away from cash."

"Maybe cash isn't shrinking, but is going to be gone in 20 years. I don't know when. Certainly long-, long-term there are headwinds," Phillip Cook said.

Pertz is thinking in terms of multiyear financial targets rather than looking out decades.

World events also can send a sudden reminder of cash's critical role in the every day, even at a time of rapid innovation. "Look at Puerto Rico, where all the ATMs went down for days," Pertz said. "We rushed in with some competitors, truckloads of cash to help the society continue to operate. Federal regulation requires that all banks have a certain amount of cash available same day. They don't do that with cryptocurrency or Venmo cards," he said. "We're in a cash business today that's big."